Europe gets lengthy homework assignment from G-20

But Europe statements suggest some disarray

WASHINGTON (MarketWatch) — The Group of 20 leaders presented a lengthy homework assignment to their European colleagues and said it was critical that some of the work be completed at the European Union summit meeting later this month.

The thorniest task the euro-zone accepted at the meeting in Los Cabos, Mexico will be ”to break the feedback loop” between weak banks and weak sovereigns.

Another challenge will be to make sure that countries like Spain and Italy can borrow at sustainable interest rates.

President Barack Obama called Europe “a very complicated situation” but stressed he was confident that Europe will meet its challenges.

U.S. officials say they see no point in hectoring Europe to act. ”We’re trying to be careful not to add to their complications,” a senior administration official said.

Instead, Obama said he wanted to create “a positive cycle” where markets settle down and give Europe time to reform.

NBC News reported, quoting administration sources, that German Chancellor Angela Merkel faced blunt lobbying from other G-20 leaders to hold the euro zone together. Obama sometimes had to play mediator between the two sides, the report said.

A senior administration official defended Germany, saying Berlin “is playing a very constructive role in this crisis.”

“I believe that Germany and other countries in Europe represented here understand how severe, how serious the challenges are right now. And they know they’re going to have to do more,” the official said.

International Monetary Fund managing director Christine Lagarde also accentuated the positive, saying in a statement that “the seeds of a pan-European recovery plan were planted” in Los Cabos.

The IMF announced that contributions from several emerging-market countries have boosted its special crisis war chest to $456 billion, well above the $430 billion agreed in April. China offered $43 billion to the IMF fund.

But discussions among the Europeans mostly showed disarray, with conflicting reports of support for crisis-hit nations and a public spat between senior English and French officials over tax policy.

Germany in the spotlight

Reuters

Brazil's President Dilma Rousseff (right) and German Chancellor Angela Merkel talk in a bilateral meeting in Los Cabos June 19, 2012.

Midday at the summit, reports surfaced in British news outlets that Germany was going to end its opposition to the euro zone’s bailout funds buying the sovereign debt of troubled European nations.

The reports in the Guardian, Sky News and other U.K. media outlets sent the euro
EURUSD, -0.4979%
higher in trading.

The stories, without attribution, said the money would come from the 500 billion euro ($634.6 billion) European Stability Mechanism and the 250 billion euro European Financial Stability Facility.

The reports said any announcement would not come in Mexico. The ESM rescue fund has yet to be ratified by European governments, including Germany.

Soon after the reports appeared, a German government official said there was no discussion of the proposal, and the euro fell in foreign exchange markets.

Analysts later noted that the ESM already had the power to buy bonds if all member states agreed and if the country whose bonds were being purchased agreed to certain conditions.

Britain, France

British Prime Minister David Cameron sparked a war of words with French officials by saying he would roll out the red carpet for French firms if new French President Francois Hollande raised taxes as planned on the wealthy.

Holland reacted coolly, saying that European solidarity should be strong.

Obama met separately with the European members of the G-20 on Tuesday. He also met one-on-one with Merkel.

Another task for the euro-zone members will be to work with the next Greek government to make sure they stay on the path of reform while staying in the euro-zone.

Europe also agreed to move on a more integrated financial architecture, including common banking supervision, resolution, recapitalization and deposit insurance.

Spain will also give clarity to markets on the form and structure of support for its banking sector.

Investors are worried the 100 billion euro rescue of Spain’s banks will add to Madrid’s debt burden as the terms of the rescue plan are still being negotiated.

Some countries want the European Stability Mechanism to be able to inject equity directly into euro-zone banks but Germany remains opposed.

Growth plans?

Almost as an after-thought, Europe also agreed to promote growth whenever possible.

Obama administration officials had warned reporters that they did not expect Europe to take action at the G-20 summit. But they want the Europeans to move swiftly in coming days.

Treasury Secretary Timothy Geithner said the EU leaders summit at the end of next week would be “a really critical summit.”

Asked if the European crisis would cost him the presidency in the November election, Obama replied: “that is not my biggest concern right now.”

The White House also announced the U.S. and EU will explore ways to deepen existing trade ties although they stopped short of mentioning a potential free-trade deal.

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